Freelancing is an exciting adventure, but it’s rarely an easy one. A freelance worker is fully responsible for generating their own income, and their time is quite literally money.
As a freelance worker, who does not have the security of a regular salary, attracting customers will take up a large proportion of your time.
Apart from the hours you spend working, you also have to find space in your day to deal with suppliers, address any staff issues, keep your office space functioning properly and maybe, just maybe, do a little planning for future growth.
Little wonder if apparently mundane tasks such as taking care of taxes are all too often pushed to the bottom of that ever-lengthening “to do” list.
But for any new venture one of the most difficult and important things is to maintain a positive cash flow. Getting hit with a large and unexpected tax bill is the last thing you need when you’re just getting established.
So it makes sense to pay attention to your taxes from day one. And taking just a few simple steps will help you to reduce your liabilities and meet your tax obligations on time with a minimum of stress.
What Taxes Will I Have to Pay?
Individuals carrying on freelance businesses usually operate as Sole proprietors. For tax purposes, your income is reported on your personal tax return.
The first thing is to be aware of the taxes you may be required to pay and any deductions you may be entitled to.
Income Tax
One of the advantages of employment is that your taxes are calculated by your employer and automatically withheld from your salaries.
But as a freelancer you will need to calculate your own federal (and possibly state) tax liabilities and, ideally, put aside sufficient funds through the year to cover them.
This is not as straightforward as it might sound, especially for new businesses, and it’s vital to keep full and accurate records from day one.
Deductions
As a freelancer you are generally entitled to deduct business expenses, but determining exactly what is and is not allowable in the eyes of the tax authorities can be a complex matter.
The basic rule is that the expenses claimed must be incurred solely in connection with the running of the business. That might sounds simple, but some research suggests that almost 75% of freelancers are not claiming any deductions at all. These people may be leaving thousands of dollars of revenue on the table for expenses such as purchasing a computer for work or traveling to meet with clients.
There are two essential ingredients to maximizing your deductions: accounting software and the advice of a tax professional. That’s why UBR Tax tracks all your income and expenses so you don’t miss any deductions.
Your taxes can be simple
Managing business taxes can be a major headache even for the seasoned freelancer. When you’re just starting out, it can seem as though you’re sinking into a morass of bureaucratic rules, regulations and conflicting advice.
Getting the advice of a tax professional as soon as you get your first paying client, and preferably even before, is an investment which will repay you many times over both in hard cash and peace of mind.